How to Spot a Predatory Loan

Over a couple of beers on a sunny afternoon back in 2006, a friend told me he’d just bought a great new house with no money down and a cursory credit check. Congratulating him, I asked what the house cost, to which he proudly responded $1.5 million.

Amazed, I asked how he could afford the mortgage on a million-dollar house. He responded it was an interest-only loan he’d refinance before the grace period was up, extract the equity, and use it to buy a more reasonably priced home.

Well, we all know what happened next. Unfortunately, my friend didn’t know how to spot a predatory loan.

Here’s what you should look for.

It Seems Too Good
My friend was granted a massive loan with no credit check, no money down and insufficient income to support the payments. Granted, he wasn’t alone in that situation. Home values were rising sharply. People got caught up in “flipping fever”, thinking they could get out of those loans before the piper came calling.

Many didn’t.

When it comes to finances, if it seems too good to be true, it usually is.

Pressure to “Act Now While the Deal Is Hot”
Predatory lenders depend on borrowers who think with their hearts rather than their heads. If they can get you to be afraid of missing out, they can coerce you into making irrational decisions.

In most cases, a deal that’s here today will be here tomorrow as well. Take your time and think things through. Look at the numbers from the perspective that you’ll be dealing with them for the better part of 15 to 30 years.

Once you’ve caught your breath, decide how you want to proceed.

Falsifying Application Information Is Encouraged
Yeah, that’s fraud and it’s a Federal rap. Anybody encouraging you to do this is more interested in banking the commission than seeing you get a loan with which you can live comfortably.

If you’re up to your eyeballs in debt and they say don’t worry about it, we’ll just tell them you make more money; you’re dealing with someone who’s out to take advantage of you.

If your situation is close to getting out of hand, you’ll be much better off working with a reputable organization like Freedom Debt Relief to get your financial house in order first. Then you can go find a lender who won’t push you deeper into debt just to enrich themselves.

Terms Suddenly Change at Closing
So, you’ve been promised a 30-year loan at five percent interest, with 10 percent down and a mortgage insurance policy. However, when you go in to sign the papers, you’re told there was a mistake. The rate is actually seven percent and there will be a few additional fees to make it work.

This is a classic bait and switch.

You were lured in with favorable terms, but when it came down to it, you were presented a less enticing deal. While the revisions aren’t bad enough to put you off the transaction altogether, they will cost you several thousand dollars more over the life of the loan, which — “coincidentally” — the lender rakes in right off the top.

Hey; everyone is trying to do the best they can with what they have. That’s a given. However, there are sharks out there looking for prey. Understanding how to spot a predatory loan will help you protect your family’s future.

If it seems too good to be true, it usually is. If someone is trying to rush you, they have an ulterior motive. If you’re encouraged to lie about your finances to qualify, or that sweet deal they promised you fails to materialize, walk away as quickly as possible.

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